UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period Ended: February 28, 2007
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Commission File Number 000-49908
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CYTODYN, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 75-3056237
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
227 E. Palace Avenue, Suite M, Santa Fe, New Mexico 87501
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(505) 988-5520
(Registrant's telephone number, including area code)
(Former address, changed sine last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common stock, no par value 11,297,264
- -------------------------- ---------
Class Number of shares outstanding at March 31, 2007
Transitional Small Business Disclosure Format: Yes No X
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): Yes No X
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TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements 2
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Item 2 Plan of Operation 19
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Item 3 Controls and Procedures 26
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PART II OTHER INFORMATION
Item 1 Legal Proceedings 28
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 30
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Item 3 Defaults Upon Senior Securities 30
--------------------------------
Item 4 Submission of Matters to a Vote of Security Holders 30
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Item 5 Other Information 31
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Item 6 Exhibits 31
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Part I Item 1. Financial Statements
Page
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Condensed Consolidated Balance Sheets at February 28, 2007 and
May 31, 2006.............................................................. 3
Condensed Consolidated Statements of Operations for the three and
nine months ended February 28, 2007 and 2006 and the period from
October 28, 2003 (inception) through February 28, 2007 ................... 4
Condensed Consolidated Statements of Changes in Shareholders' Deficit
for the nine months ended February 28, 2007 and for the period from
October 28, 2003 (inception) through February 28, 2007 .................. 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended February 28, 2007 and 2006 and the period from October 28, 2003
(inception) through February 28, 2007..................................... 7
Notes to Condensed Consolidated Financial Statements....................... 9
2
CYTODYN, INC.
(A Development Stage Company)
Condensed Consolidated
Balance Sheet
Assets
February 28, 2007 May 31, 2006
Current Assets: (unaudited) (audited)
----------------- -----------------
Cash ...................................................... $ 100,497 $ 125,320
Prepaid Insurance ......................................... 6,083 36,100
Prepaid Sponsored Research ................................ 93,200 --
----------------- -----------------
Total current assets ............................ 199,780 161,420
Furniture and equipment, net ................................. 2,970 2,334
Intangible asset, net ........................................ 1,656 1,128
Deposit ...................................................... 495 495
----------------- -----------------
$ 204,901 $ 165,377
================= =================
Liabilities and Shareholders' Deficit
Current Liabilities:
Accounts payable .......................................... $ 119,941 $ 110,267
Accrued liabilities ....................................... 148,183 133,588
Accrued interest payable .................................. 8,366 5,267
Convertible notes payable, net ............................ 10,604 23,863
Indebtedness to related parties ........................... 455,702 393,360
----------------- -----------------
Total current liabilities ....................... 742,796 666,345
Commitments and contingencies ................................ 150,000 150,000
----------------- -----------------
Total liabilities ............................... 892,796 816,345
----------------- -----------------
Shareholders' deficit :
Preferred stock, no par value; 5,000,000 shares authorized,
100,000 shares issued and outstanding .................... 167,500 --
Common stock, no par value; 25,000,000 shares authorized,
11,297,264 and 9,147,664 shares issued and outstanding,
respectively ............................................. 4,146,465 3,062,566
Stock for Prepaid Services ................................ (9,943) (267,060)
Additional paid-in capital ................................ 1,853,982 1,324,509
Accumulated deficit ....................................... (1,601,912) (1,601,912)
Deficit accumulated during development stage .............. (5,243,987) (3,169,071)
----------------- -----------------
Total shareholders' deficit ..................... (687,895) (650,968)
----------------- -----------------
$ 204,901 $ 165,377
================= =================
3
CYTODYN, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Operation
Unaudited
Three Months Ended Nine Months Ended October 28, 2003
February 28 February 28 (Inception)
---------------------------- ---------------------------- through
2007 2006 2007 2006 February 28, 2007
------------ ------------ ------------ ------------ -----------------
Operating expenses:
General and administrative ..... $ 418,469 $ 254,487 $ 1,304,592 $ 404,168 3,417,928
Amortization / Depreciation .... 816 589 124,281 1,613 128,257
Research and Development ....... 52,909 -- 374,650 -- 736,992
Legal Fees ..................... 79,540 -- 132,081 -- 198,831
Commitments and Contingencies .. -- -- -- -- 150,000
------------ ------------ ------------ ------------ ----------------
Total operating expenses 551,734 255,076 1,935,604 405,781 4,632,008
------------ ------------ ------------ ------------ ----------------
Operating loss ......... (551,734) (255,076) (1,935,604) (405,781) (4,632,008)
Interest income ................... 26 2 946 100 1,624
Interest expense:
Interest on convertible debt and
other notes ................... (7,622) (18,798) (140,258) (18,798) (611,723)
Other .......................... -- (162) -- (2,166) (1,880)
------------ ------------ ------------ ------------ ----------------
Loss before income taxes (559,330) (274,034) (2,074,916) (426,645) (5,243,987)
Income tax provision .............. -- -- -- -- --
------------ ------------ ------------ ------------ ----------------
Net loss ............... (559,330) $ (274,034) $ (2,074,916) $ (426,645) (5,243,987)
============ ============ ============ ============ ================
Basic and diluted loss per share .. $ (0.05) $ (0.03) $ (0.19) $ (0.05) $ (0.59)
============ ============ ============ ============ ================
Basic and diluted weighted average
common shares outstanding ........ 11,281,597 8,542,032 10,895,897 8,542,032 8,838,245
============ ============ ============ ============ ================
4
CYTODYN, INC.
(A Development Stage Company)
Condensed Consolidated Statement of Changes in Shareholders' Deficit
October 28, 2003 (Inception) through February 28, 2007
Deficit
Accumulated
Preferred Stock Common Stock Stock for Additional During
----------------- ---------------------- Prepaid Paid-in Accumulated Development
Shares Amount Shares Amount Services Capital Deficit Stage Total
------- -------- ----------- ---------- --------- ----------- ----------- ----------- -----------
As Restated As Restated As Restated
----------- ----------- -----------
Balance at October
28, 2003, following
recapitalization .. -- $ -- 6,252,640 $1,425,334 $ -- $ 23,502 $(1,594,042) $ -- $ (145,206)
February through
April 2004, sale of
common stock less
offering costs of
$54,000
($.30/share) ...... -- -- 1,800,000 486,000 -- -- -- -- 486,000
February 2004,
shares issued to
former officer as
payment for working
capital advance
($.30/share) ...... -- -- 16,667 5,000 -- -- -- -- 5,000
Net loss, year ended
May 31, 2004 ...... -- -- -- -- -- -- (7,870) (338,044) (345,914)
------- -------- ----------- ---------- --------- ----------- ----------- ----------- -----------
Balance at May 31,
2004 .............. -- -- 8,069,307 1,916,334 -- 23,502 (1,601,912) (338,044) (120)
July 2004, capital
contribution by an
officer ........... -- -- -- -- -- 512 -- -- 512
November 2004,
common stock
warrants granted .. -- -- -- -- -- 11,928 -- -- 11,928
February 2005,
capital contribution
by an officer ..... -- -- -- -- -- 5,000 -- -- 5,000
Net loss, year ended
May 31,2005 ....... -- -- -- -- -- -- -- (777,083) (777,083)
------- -------- ----------- ---------- --------- ----------- ----------- ----------- -----------
Balance at May 31,
2005 .............. -- -- 8,069,307 1,916,334 -- 40,942 (1,601,912) (1,115,127) (759,763)
June through July
2005, sale of
common stock less
offering costs of
$27,867
($0.75/share) ..... -- -- 289,890 189,550 -- -- -- -- 189,550
August 2005, common
shares issued to
extinguish
promissory notes
payable and related
interest
($0.75/share) ..... -- -- 160,110 120,082 -- -- -- -- 120,082
May 2006, common
shares issued to
extinguish
convertible debt .. -- -- 350,000 437,500 -- -- -- -- 437,500
November 2005, 94,500
warrants exercised
($0.30/share) ..... -- -- 94,500 28,350 -- -- -- -- 28,350
January through
April 2006, common
shares issued for
prepaid services .. -- -- 183,857 370,750 (370,750) -- -- -- --
5
CYTODYN, INC.
(A Development Stage Company)
Condensed Consolidated Statement of Changes in Shareholders' Deficit
October 28, 2003 (Inception) through February 28, 2007 - Continued
Deficit
Accumulated
Preferred Stock Common Stock Stock for Additional During
----------------- ---------------------- Prepaid Paid-in Accumulated Development
Shares Amount Shares Amount Services Capital Deficit Stage Total
------- -------- ----------- ---------- --------- ----------- ----------- ----------- -----------
As Restated As Restated As Restated
----------- ----------- -----------
Amortization of
Prepaid Stock
Services .......... -- -- -- -- 103,690 -- -- -- 103,690
January through June
2006, warrants
issued with
convertible debt .. -- -- -- -- -- 274,950 -- -- 274,950
January through May
2006, beneficial
conversion feature
of convertible
debt .............. -- -- -- -- -- 234,550 -- -- 234,550
March through May
2006, stock options
granted to
consultants ....... -- -- -- -- -- 687,726 -- -- 687,726
March 2006, stock
options issued to
extinguish debt ... -- -- -- -- -- 86,341 -- -- 86,341
-- -- -- -- -- -- -- (2,053,944) (2,053,944)
------- -------- ----------- ---------- --------- ----------- ----------- ----------- -----------
Balance at May 31,
2006 .............. -- $ -- $ 9,147,664 $3,062,566 $(267,060) $ 1,324,509 $(1,601,912) $(3,169,071) $ (650,968)
======= ======== =========== ========== ========= =========== =========== =========== ===========
Common stock issued
to extinguish ..... -- -- 119,600 149,500 -- -- -- -- 149,500
Convertible debt
Stock issued for AITI
acquisition ....... -- -- 2,000,000 934,399 -- -- -- -- 934,399
Amortization of
Prepaid Stock
Services .......... -- -- -- -- 257,117 -- -- -- 257,117
Stock-Based
Compensation ...... -- -- -- -- -- 410,573 -- -- 410,573
Warrants issued with
Convertible Debt .. -- -- -- -- -- 92,500 -- -- 92,500
Common stock issued
for Services ...... -- -- 30,000 -- -- 26,400 -- -- 26,400
Preferred Shares
Issued AGTI ....... 100,000 167,500 -- -- -- -- -- -- 167,500
Net Loss February 28,
2007 .............. -- -- -- -- -- -- -- (2,074,916) (2,074,916)
------- -------- ----------- ---------- --------- ----------- ----------- ----------- -----------
Balance at February
28, 2007
(unaudited) ....... 100,000 $167,500 $11,297,264 $4,146,465 $ (9,943) $ 1,853,982 $(1,601,912) $(5,243,987) $ (687,895)
======= ======== =========== ========== ========= =========== =========== =========== ===========
6
CYTODYN, INC.
(A Development Stage Company)
Condensed Consolidated Statement of Cash Flows
Unaudited
Nine Months Ended October 28, 2003
February 28 (Inception)
-------------------------- through
2006 2005 February 28, 2007
----------- ----------- -----------------
Cash flows from operating activities:
Net loss ........................................... $(2,074,916) $ (426,645) $ (5,243,987)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization /Depreciation ...................... 124,281 1,613 128,257
Amortization of original issue discount ......... 136,241 16,985 597,603
Purchased in-process Research & Development ..... 274,399 -- 274,399
Stock-based compensation ........................ 694,089 12,900 1,373,777
Changes in current assets and liabilities:
prepaid expenses ....................... 30,019 62,863 (6,081)
deposits ............................... -- -- (495)
accounts payable and accrued liabilities 27,368 16,363 426,490
----------- ----------- -----------------
Net cash used in
operating activities ................... (788,519) (315,921) (2,450,037)
----------- ----------- -----------------
Cash flows from investing activities:
Furniture and equipment purchases .................. (3,345) (936) (10,783)
----------- ----------- -----------------
Net cash used in
investing activities ............................ (3,345) (936) (10,783)
----------- ----------- -----------------
Cash flows from financing activities:
Proceeds from exercise of warrants ................. -- 28,350 28,350
Capital contributions by president ................. -- -- 5,512
Proceeds of notes payable to related parties ....... 62,341 5,197 573,441
Payments of related party notes .................... -- (38,324) (38,324)
Proceeds from convertible notes .................... 92,500 222,500 673,000
Proceeds from the sale of common stock ............. -- 217,418 785,767
Payments for offering costs ........................ -- (27,867) (81,867)
Proceeds from acqusition of AITI ................... 512,200 -- 512,200
Proceeds from acqusition of AGTI ................... 100,000 -- --
----------- ----------- -----------------
Net cash provided by
financing activities ............................ 767,041 407,274 2,429,729
----------- ----------- -----------------
Net change in cash .............................. (24,823) 90,417 97,259
Cash, beginning of period ............................... 125,320 930 3,238
----------- ----------- -----------------
Cash, end of period ..................................... $ 100,497 $ 91,347 $ 100,497
=========== =========== =================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes .................................... $ -- $ -- $ --
=========== =========== =================
Interest ........................................ $ -- $ 138 $ 1,126
=========== =========== =================
Non-cash investing and financing transactions:
Net assets acquired in exchange for common
stock in CytoDyn/Rexray business
combination ............................ $ -- $ -- $ 7,542
=========== =========== =================
Common stock issued to former officer to ........ $ -- $ -- $ 5,000
=========== =========== =================
Common stock issued for convertible debt ........ $ 149,500 $ -- $ 587,000
=========== =========== =================
Common stock issued for debt .................... $ -- $ 120,082 $ 120,082
=========== =========== =================
7
CYTODYN, INC.
(A Development Stage Company)
Condensed Consolidated Statement of Cash Flows
Unaudited
Options to purchase common stock issued
for debt ............................... $ -- $ -- $ 86,341
=========== =========== =================
Original issue discount and intrinsic value
of beneficial conversion feature
related to debt issued with warrants ... $ 92,500 $ -- $ 602,000
=========== =========== =================
On July 18, 2006 the company issued 2,000,000 shares of unregistered
restricted common stock for 1,000 shares of AITI common stock. The
acquistion was accounted for as an asset purchase (See Note 2). The company
acquired $512,200 in cash, a prepaid sponsored research project for
$162,800, a license agreement for $150,000, and acquired $109,399 in
expenses associated with the license agreement. Additionally, subsequent to
the acquistion, the company expensed the entire license agreement as a
component of research and development expense.
On January 30, 2007, the company issued 100,000 preferred shares of
unregistered stock for 1,000 shares of AGTI common stock. The acqusition
was accounted for as an asset purchase (See Note 2). The company acquired
prepaid license fee for seven years and $100,000 in cash. $52,500 was
recorded as prepaid license fees and $15,000 for the up fron license fee,
was expensed as research and development.
8
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
1 - Organization:
The Company was incorporated under the laws of Colorado on May 2, 2002
under the name Rexray Corporation ("Rexray"). The Company entered the
development stage effective October 28, 2003 and follows Statements of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by
Development Stage Enterprises". On October 27, 2003, Rexray changed its
name to CytoDyn, Inc.
2 - Summary of Significant Accounting Policies:
Basis of Presentation - The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America and reflect all adjustments,
consisting solely of normal recurring adjustments, needed to fairly present
the financial results for these periods.
The condensed consolidated financial statements and notes are presented as
permitted by Form 10-QSB. Accordingly, certain information and note
disclosures normally included in the financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been omitted. The accompanying consolidated
financial statements should be read in conjunction with the financial
statements for the years ended May 31, 2006 and 2005 and notes thereto in
the Company's annual report on Form 10-KSB/A for the year ended May 31,
2006, filed with the Securities and Exchange Commission on November 9,
2006. Operating results for the three and nine months ended February 28,
2007 are not necessarily indicative of the results that may be expected for
the entire year.
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the three and nine month period ended February 28, 2007 and 2006
and the Period October 28, 2003 (Date of Inception) through February 28, 2007,
(b) the financial position at February 28, 2007, and (c) cash flows for the nine
month period ended February 28, 2007 and 2006, and the Period October 28, 2003
(Date of Inception) through February 28, 2007, have been made.
Principles of Consolidation. - The consolidated financials statements include
the accounts of CytoDyn Inc and its wholly owned subsidiaries; Advanced
Influenza Technologies, Inc. and Advanced Genetic Technologies, Inc. All
intercompany transactions and balances are eliminated in consolidation.
Going Concern - The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying financial statements, the Company is currently in the development
stage with losses for all periods presented. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
obtain additional operating capital, complete development of its medical
treatment, obtain FDA approval, outsource manufacturing of the treatment, and
ultimately to attain profitability. The Company intends to seek additional
funding through equity offerings to fund its business plan. There is no
assurance that the Company will be successful in these endeavors.
9
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
Use of Estimates - The preparation of the consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less when acquired, to
be cash equivalents. The Company had no cash equivalents as of February 28, 2007
or May 31, 2006. The Company maintains its cash in bank deposit accounts, which
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Furniture, Equipment and Depreciation - Furniture and equipment are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, generally three to seven years. Maintenance
and repairs are charged to expense as incurred and major improvements or
betterments are capitalized. Gains or losses on sales or retirements are
included in the statement of operations in the year of disposition.
Impairment of Long-Lived Assets - The Company evaluates the carrying value of
any long-lived assets under the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 requires impairment
losses to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell. There were no impairment charges for the three and
nine months ended February 28, 2007 and 2006, and for the period October 28,
2003 (inception date) through February 28, 2007.
Research and Development - Research and development costs are expensed as
incurred.
Financial Instruments - At February 28, 2007, and May 31, 2006, the carrying
value of the Company's financial instruments approximate fair value due to the
short-term maturity of the instruments.
Stock-based compensation - In December 2004, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123 (Revised 2004), Share-Based Payments ("SFAS
No. 123R"). SFAS No. 123R requires companies to measure the cost of employee
services received in exchange for the award of equity instruments based on the
fair value of the award at the date of grant. The expense is to be recognized
over the period during which an employee is required to provide services in
exchange for the award. SFAS No. 123R is effective as of the beginning of the
first interim or annual reporting period that begins after December 15, 2005 and
accordingly the Company adopted this standard on June 1, 2006.
SFAS No. 123R provides for two transition methods. The "modified prospective"
method requires that share-based compensation expense be recorded for any
employee options granted after the adoption date and for the unvested portion of
any employee options outstanding as of the adoption date. The "modified
retrospective" method requires that, beginning June 1, 2006, all prior periods
presented be restated to reflect the impact of share-based compensation expense
consistent with the proforma disclosures previously required under SFAS No. 123.
The Company adopted the modified prospective application of SFAS No.123(R)
effective June 1, 2006, and as a result, was not required to restate its
financial results for prior periods.
Prior to June 1, 2006, the Company had adopted SFAS No. 123, Accounting for
Stock-Based Compensation. As provided for by SFAS No. 123, the Company had
elected to continue to account for its stock-based compensation programs
according to the provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees. Accordingly, compensation expense
had been recognized to the extent of employee or director services rendered
10
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
based on the intrinsic value of stock options granted under the plan. The
Company accounted for common stock, stock options, and warrants granted to
non-employees based on the fair market value of the instrument, using the
Black-Scholes option pricing model based on assumptions for expected stock price
volatility, term of the option, risk-free interest rate and expected dividend
yield at the grant date.
For all awards granted prior to June 1, 2006, the unearned deferred fair value
of stock-based compensation was recognized as an expense on a straight-line
basis over the remaining requisite service period, ranging from three months to
four years.
There was no impact on operating results and per share information had the
Company accounted for stock based compensation in accordance with SFAS No. 123R
for the three and nine months ended February 28, 2006.
Effective June 1, 2006 ,the estimated fair value of options and warrants granted
is determined in accordance with SFAS No. 123R on the date of grant using the
Black-Scholes option valuation model with the following weighted-average
assumptions. Risk free interest rate of 4.56% to 5.2%; dividend yield 0%;
volatility 153% to 161% and expected life of five years. The risk-free interest
rate assumption is based upon observed interest rates appropriate for the
expected term of the stock options. The expected volatility is based on the
historical volatility of the Company's common stock. The Company has not paid
any dividends on its common stock since its inception and does not anticipate
paying dividends on its common stock in the foreseeable future. The computation
of the expected option term is based on the "simplfied method" as the Company's
stock options are "plain vanilla" options, and the Company has a limited history
of exercise data. For common stock options and warrants with graded vesting, the
Company recognizes the related compensation costs associated with these options
and warrants on a straight line basis over the requisite service period.
SFAS No. 123R requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Based on limited historical experience of forfeitures, the
Company estimated future unvested option forfeitures at 0% as of February 28,
2007 and incorporated this rate in the estimated fair value of employee option
grants.
As a result of adopting SFAS No. 123R, the Company's operating loss, and net
loss were approximately $124,000, $411,000, and $411,000 lower for the three and
nine months ended February 28, 2007, and for the period October 28, 2003
(inception date) through February 28, 2007 than if the Company had continued to
account for stock based compensation under APB Opinion No. 25. The impact to
basic and diluted weighted averages was approximately $(.01), $(.04), and $(.04
)per share, for the above periods, respectively.
Net cash proceeds from the exercise of stock options and warrants were $0 for
the three and nine months ended February 28, 2007. At February 28, 2007, there
was approximately $843,000 of unrecognized compensation cost related to
share-based payments for unvested options, which is expected to be recognized
over a weighted average period of 2.55 years.
11
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
The following table represents stock option and warrants activity as of and for
the nine months ended February 28, 2007.
Weighted
Weighted Average
Average Remaining Aggregate
Number Exercise Contractual Intrinsic
of shares Price Life Value
----------- -------- ----------- ---------
Options and warrants outstanding -May 31, 2006 1,532,222 $1.73
Granted 515,000 $1.25
Exercised -- --
Forfeited/expired/cancelled -- --
Options and warrants Outstanding - February 28, 2007 2,047,222 $1.61 6.96 years $ 247,000
Outstanding Exercisable - February 28, 2007
----------- -------- ----------- ---------
1,560,644 $1.56 6.30 years $ 247,000
=========== ======== =========== =========
The total grant date fair value of options vested during the nine months ended
February 28, 2007 and 2006 was approximately $403,000 and $0, respectively. The
grant date fair value of options granted for the three and nine months ended
February 28, 2007 and 2006 was $0, $1.03,$0 and $0, respectively.
Stock Issued for Services
- -------------------------
During the year ended May 31, 2006, the Company issued common stock for certain
services to a public relations company and a technology company. The Company
recorded into additional paid in capital, the fair value of the common stock
issued based on the quoted market price of the Company's common stock at the
date of the respective agreements with the above parties. A contra-equity was
recorded for the above services, which is being amortized into compensation
expense and additional paid in capital over the requisite service period of the
agreements. During the three and nine month periods ended February 28, 2007, and
for the period October 28, 2003 (inception date) through February 28, 2007,
approximately $67,000, $257,000 and $355,000 was recognized as compensation
expense related to these agreements, respectively. As of February 28, 2007, the
unamortized portion of the stock for services was approximately $10,000. There
was no compensation expense associated with these stock transactions for the
three and nine months ended February 28, 2006.
During the period ended February 28, 2007, the company issued 30,000 shares of
restricted common stock to a consultant. The shares were fully vested at the
grant date, and accordingly, the company recognized $26,400 in compensation
expense based on the fair market price of the stock at the grant date.
Earnings (Loss) per Common Share -. Basic earnings (loss) per share is computed
by dividing the net income or loss by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average common shares and
potentially dilutive common share equivalents. The effects of potential common
stock equivalents are not included in computations when their effect is
antidilutive. Because of the net loss for the three and nine month period ended
February 28, 2007 and 2006, the basic and diluted weighted average shares
outstanding are the same, since including the additional shares would have an
antidilutive effect on the loss per share calculation. Common stock options and
warrants to purchase 2,047,222 and 659,500 shares of common stock were not
included in the computation of basic and diluted weighted average common shares
outstanding for the three and nine months ended February 28, 2007 and 2006,
respectively because the effect of such options would be anti-dilutive.
12
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
Reclassification - Certain prior period amounts have been reclassified to comply
with current period presentation.
3 - Recent Accounting Pronouncements:
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error
Corrections. This statement, which replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, requires that a voluntary change in accounting
principle be applied retrospectively to all prior period financial
statements presented, unless it is impracticable to do so. SFAS 154 also
provides that a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate effected by a
change in accounting principle, and also provides that correction of errors
in previously issued financial statements should be termed a "restatement."
SFAS 154 is effective for our fiscal year beginning July 1, 2006. We
anticipate that the adoption of SFAS 154 will not have a material impact on
our financial statements.
In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments--an amendment of FASB Statements No. 133 and 140.
This statement allows financial instruments that have embedded derivatives
to be accounted for as a whole (eliminating the need to bifurcate the
derivative from its host) if the holder elects to account for the whole
instrument on a fair value basis. SFAS 155 shall be effective for all
financial instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of an entity's first fiscal year
that begins after September 15, 2006. We anticipate that SFAS 155 will not
have a material impact on our financial statements.
In March 2006, the FASB issued SFAS 156, Accounting for Servicing of
Financial Assets--an amendment of FASB Statement No. 140. The statement
addresses the recognition and measurement of separately recognized
servicing assets and liabilities and provides an approach to simplify
efforts to obtain hedge-like (offset) accounting. Entities shall adopt this
statement as of the beginning of the first fiscal year that begins after
September 15, 2006. Earlier adoption is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued financial
statements, including interim financial statements, for any period of that
fiscal year. The effective date of this statement is the date that an
entity adopts the requirements of this statement. We anticipate that SFAS
156 will not have a material impact on our financial statements.
In September 2006, Statement 157, Fair Value Measurements, was issued by
the FASB and is effective for financial statements for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Statement 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles (GAAP),
and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair
value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute. Accordingly, this Statement does not require any new fair value
measurements. However, for some entities, the application of this Statement
will change current practice. We anticipate that SFAS 157 will not have a
material impact on our financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Current Year Misstatements." SAB No. 108
requires analysis of misstatements using both an income statement
(rollover) approach and a balance sheet (iron curtain) approach in
assessing materiality and provides a one-time cumulative effect transition
adjustment. SAB No. 108 is effective for our 2006 annual financial
statements. The adoption of SAB No. 108 did not materially impact the
consolidated financial statements.
13
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
We have reviewed all other recently issued, but not yet effective,
accounting pronouncements and do not believe any such pronouncements will
have a material impact on our financial statements.
4 - Acquisitions
On July 18, 2006 CytoDyn, Inc. entered into an acquisition agreement with
UTEK Corporation, to purchased all 1,000 issued and outstanding shares of
Advanced Influenza Technologies, Inc. (AITI), a Florida Corporation in
exchange for 2,000,000 unregistered restricted common shares of CytoDyn,
Inc stock.
The transaction was accounted for as an asset purchase, and not an
acquisition of a business, as AITI had no employees, operations, or
customers, and was essentially a shell corporation to hold the assets
acquired. Pursuant to the agreement, the Company acquired $512,200 in cash,
and a prepaid sponsored research project of $162,800 from the University of
Massachusetts to further the technology associated with certain acquired
licenses. The $162,800 is being amortized into research and development
expense as the services are provided. The term of the licensing agreement
is until the later of 20 years from the filing date of the licensed patents
or the expiration of the last to expire patent of the licensed patents.The
company valued the assets acquired based on the consideration received
rather than the fair market value of the shares issued, as the company
believed this was more indicative of the value of the assets acquired. In
addition to the cash, and the prepaid sponsored research project, the
Company acquired the worldwide nonexclusive and exclusive license
agreements from the University of Massachusetts for certain technologies.
The license agreements were recorded as research and development expense,
as the patent rights or license agreements are being used in a particular
research project, and have no alternative future use outside of this
project. Including the license agreements, a total of $259,399 of
in-process research and development was acquired related to the
acquisition, which is included as a component of research and development
expense for the period ended February 28, 2007.The license agreement grants
the Company the exclusive right to develop and commercialize the licensed
products associated with certain existing patents.
Milestone fees are payable to the University per licensed product and due
within 30 days of the event of certain occurrences required.
The University shall also receive 4% royalties on net sales of the license
products.
AITI also has agreed to fund a two year ($325,600) unrestricted project
($162,800 per year) under the Sponsored Research Agreement with the primary
objective during the first year to conduct lab work to provide well
documented research studies. If after one year the desired outcome is not
achieved the agreement can be cancelled and the second year's payment is
not required.
On January 30, 2007 CytoDyn, Inc. entered into an Acquisition agreement
with UTEK Corporation, to acquire 100% of the outstanding stock of Advanced
Genetic Technologies, Inc.(AGTI), a Florida Corporation in exchange for
100,000 preferred no par value stock convertible into $1,300,000 worth of
common unregistered restricted shares of CytoDyn, Inc common stock. The
option to convert is any time after twelve (12) months and before thirty
six (36) months from the date of closing of the agreement. The conversion
option has a floor price of $.30 per share, which limits the maximum number
of shares that the company may issue upon conversion to 4,333,333 shares of
common stock.
AGTI holds the worldwide exclusive and nonexclusive license agreements from
the CBR Institute for Biomedical Research affilaited with Harvard Medical
School for certain biological materials.
The term of the licensing agreement is until the later of 20 years or the
date the last patent expires that is owned or controlled by the Licensee.
14
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
Milestone fees are payable to the University per licensed product and due
within 30 days of the event of certain occurrences required.
The University shall also receive 2% royalties of net sales of the licensed
products up to $200 million and 3% royalties of net sales in excess of $200
million. In the case of a sublicense the Univeristy would get 25% of
non-royalty sublicense income.
AGTI has prepaid the license fees in full for the next 7 years and has
$100,000 in cash.
The transaction was accounted for as an asset purchase, and not an
acquisition of a business, as AGTI had no employees, operations, or
customers, and was essentially a shell corporation to hold the assets
acquired. Pursuant to the agreement, the Company acquired $100,000 in cash,
and seven years of prepaid license fees to the Center for Biological
Research at Harvard Medical School. $52,500 is recorded as prepaid license
fees and $15,000 was expensed as Research and Development. The company
valued the assets acquired based on the consideration received rather than
the fair market value of the shares issued, as the company believed this
was more indicative of the value of the assets acquired. In addition to the
cash, and the prepaid license fees, the Company acquired the worldwide
nonexclusive and exclusive license agreements from the Center for
Biological Research at Harvard Medical School for certain biological
materials.The license agreement grants the Company the exclusive right to
develop and commercialize the licensed products associated with certain
biological materials.
5 - Convertible Notes - During the year ended May 31, 2006, the Company issued
convertible promissory notes with 407,600 warrants to purchase common stock
to individuals in exchange for proceeds totaling $509,500. $437,500 of the
convertible debt was converted into common stock. As of May 31, 2006, the
remaining face amount and unamortized discount associated with the
convertible notes was approximately $72,000 and $48,000 respectively. The
notes bear interest at five percent per annum and mature in January and
February 2007. Principal and accrued interest are payable in any
combination of cash and common stock of the Company at the option of the
lender. The Company can repay principal and accrued interest with common
stock at the rate of $1.25 per share. During the three and nine months
periods ended February 28, 2007, and 2006, and for the period October 28,
2003 (inception date) through February 28, 2007, the Company amortized
approximately $0, $48,000 and $509,500 respectively, which was included as
a component of interest expense.
During the nine months ended February 28, 2007, the Company issued $92,500
in convertible notes with $74,000 detachable common stock warrants. The
warrants to purchase common stock which accompanied the convertible
promissory notes are exercisable at $2.50 per share, vest immediately, and
expire in October 2010. Additionally, the Company recorded an original
issue discount based on the fair value of the warrants. There was no
intrinsic value associated with the conversion feature. To recognize the
original issue discount, the Company discounted the notes and increased
additional paid-in capital by $92,500. The discounts are amortized over the
life of the debt. During the three and nine month periods ended February
28, 2007, and for the period October 28, 2003 (inception date) through
February 28, 2007 the Company amortized approximately $4,000, $88,000, and
$88,000 of the discount, respectively, which is included as a component of
interest expense. As of February 28, 2007, the face amount and unamortized
discount related to convertible notes was approximately $15,000 and $4,000,
respectively.
15
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
6 - Commitments and Contingencies - All litigation reflects the efforts of Rex
H. Lewis, the previous CEO of the previous licensee Amerimmune, Inc. of the
previous privately-held company that held the Cytolin(R)technology, CytoDyn
of New Mexico, Inc., to take the property of Amerimmune, Inc., CytoDyn,
Inc. our CRO, Symbion Research International, Inc. and the manufacturer of
Cytolin(R), Vista Biologicals Corporation, for his privately held Nevada
corporation, Maya, LLC. Although these efforts have been multifaceted and
interstate in scope, all litigation reflects this one dispute or artifice.
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn
of New Mexico, Inc., Allen D. Allen, Corinne E. Allen, Ronald J. Tropp,
Brian J. McMahon, Daniel M. Strickland, M.D. and unknown others designated
as "Does 101-150".
In 2001, CytoDyn of New Mexico, Inc. as a shareholder, sued its licensee
Amerimmune Pharmaceuticals, Inc. (API) and its directors in order to
prevent the destruction of API. The Los Angeles Superior Court awarded
attorneys' fees in the amount of approximately $150,000 to the insurance
company of API. The Company has accrued the amount on the accompanying
financial statements for the period ended February 28, 2007. In 2003
CytoDyn, Inc. acquired the assets of CytoDyn of New Mexico, Inc. The
Company has appealed the Court's order. The matter has not yet been
briefed.
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
-------------------------------------------------------------------
Nature of the claims:
- --------------------------------------------------------------------------------
CytoDyn and Mr. Allen filed a complaint against Amerimmune, Inc. and
Amerimmune Pharmaceuticals, Inc. (together, "Amerimmune") to domesticate an
October 4, 2004 judgment that CytoDyn and Mr. Allen obtained against
Amerimmune in the Superior Court of California for Ventura County, case
number SC-039250. Further, CytoDyn and Mr. Allen named Biovest
International, Inc. ("Biovest") as a trustee-defendant because Biovest
possesses a Cell-Bank, the rights to which CytoDyn and Mr. Allen own.
- --------------------------------------------------------------------------------
Progress to Date:
- --------------------------------------------------------------------------------
CytoDyn and Mr. Allen were successful in having the California judgment
domesticated. Further, CytoDyn and Mr. Allen were successful in "charging"
Biovest and securing an order that Biovest transfer the Cell-Bank to
CytoDyn. However, the transfer has not occurred because recently
Amerimmune's purported successor-in-interest, Maya, Inc. ("Maya"),
intervened.
- --------------------------------------------------------------------------------
CytoDyn's's Response:
- --------------------------------------------------------------------------------
Maya, LLC purports to have taken the property of Amerimmune
Pharmaceuticals, Inc. by foreclosing on all of its property with a security
instrument Maya, LLC presented to a State Court in Nevada. CytoDyn had
already recovered its property, so even if Maya had taken the property of
Amerimmune Pharmaceuticals, it would not include the Company's technology.
Maya foreclosed on the wrong entity since it was Amerimmune, Inc. that had
originally held the technology, not Ammerimune Pharmaceuticals, Inc.
Evidence obtained through discovery shows that the Board of Directors of
Amerimmune Pharmaceuticals, Inc. had instructed Mr. Lewis to amend his
security instrument to conform to law, which he did not do before
presenting the instrument to the Court. This, and other evidence, will be
used by CytoDyn's's lawyer in Massachusetts, and the attorney for Symbion
Research International in Nevada, to seek summary judgments.
- --------------------------------------------------------------------------------
16
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
Expected Outcome:
- --------------------------------------------------------------------------------
We cannot express judgment regarding the outcome of the case or the
probable ultimate liability, if any, to be incurred by CytoDyn. However,
CytoDyn's claim to the Cell-Bank is strong and discovery has resulted in an
intention on the part of the Company's attorney to obtain summary judgment
in our favor.
- --------------------------------------------------------------------------------
Other legal/patent issues:
- --------------------------------------------------------------------------------
We have recently discovered that former employees of ex-licensee,
Amerimmune Inc., are attempting to convert technology previously
adjudicated by the Superior Court of California, County of Ventura to
belong to Symbion Research International, LLC. The technology involves
LFA-1 Alpha subunit antibodies and the use of the antibodies to treat
HIV-infected patients. Because of uncertain consequences resulting from the
actions of these rogue Amerimmune Inc. employees, Symbion Research
International is acting to remedy the situation. The former employees have
filed two U.S. patent applications and several foreign patent applications
based on a derivative international patent application. Symbion Research
International intends to correct the inventorship and assignee in these
applications.
- --------------------------------------------------------------------------------
Background:
- --------------------------------------------------------------------------------
CytoDyn of New Mexico, Inc. granted a license in its patented technology to
Amerimmune Inc., which represented that it would assist in obtaining FDA
approval of Cytolin(R). Amerimmune in turn contracted with Symbion Research
International, LLC to assist with the clinical trials of Cytolin(R).
Symbion sued Amerimmune in 2003 in Superior Court of California, County of
Ventura asserting breach for non-payment of services performed. Symbion
prevailed in that suit and the Ventura Court awarded title to all data and
additional intellectual property developed by Symbion during its
relationship with Amerimmune to Symbion. This additional intellectual
property is the subject matter of the patent applications filed by the
former employees of ex-licensee Amerimmune.
- --------------------------------------------------------------------------------
Maya LLC v. CytoDyn, et al
- --------------------------------------------------------------------------------
Maya LLC filed an action in Glendale, California alleging a number of
complaints against us and two of its officers, several of which have been
dismissed on demurrer and one of which may be dismissed on procedural
grounds. Management believes that these events reflect a retaliatory and
frivolous action on the part of Maya. Discovery has produced evidence that
the allegations of Maya, LLC are false. Although the outcome of litigation
is uncertain, our in-house counsel believes an outcome unfavorable to us is
highly unlikely. Trial is scheduled for May 8, 2007.
7 - Related Party Transactions - As of February 28, 2007, the Company owed
two officers promissory notes totaling of $71,375. The notes are due on
demand and carry no interest rate. Management plans to repay the notes
through cash payments, issuance of the Company's common stock, or a
combination thereof. The balance due of $71,375 remained unpaid at February
28, 2007 and is included in the accompanying condensed financial statements
as "Indebtedness to related parties".
17
CYTODYN, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
As of February 28, 2007 (unaudited) and May 31, 2006 (audited)
and for the nine months ended February 28, 2007 and 2006 (unaudited)
and for the period October 28, 2003 (inception date)
through February 28, 2007 (unaudited)
A former director provided legal services to the Company over the past
several years. As of February 28, 2007, the Company owed the former
director $46,985 and it is included in the accompanying financial
statements as "Indebtedness to related parties"as of February 28, 2007. As
of February 28, 2007, no arrangements had been made for the Company to
repay the balance of this obligation. The Company anticipates that the
former director will continue to provide legal services in the future.
The Company's former director, Peggy C. Pence, PhD., is the President and
Chief Executive Officer of Symbion Research International, Inc.
("Symbion"). On January 5, 2005, the Company entered into a buy-sell
agreement to purchase certain intellectual property owned by Symbion. The
agreement describes the intellectual property in detail which summarized,
is the Phase I clinical data and the protocol for the Phase II study. This
intellectual property is necessary to obtain approval for, and to conduct,
further FDA clinical tests of Cytolin. Cytolin is a potential new drug
being developed by the company for the treatment of Human Immunodeficiency
Virus ("HIV").
Under the terms of this agreement:
o The Company may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
studies for Cytolin.
o The Company granted 83,122 non-qualified stock options with an
exercise price of $.75 per share that vested immediately and are
exercisable over 5 years.
o The Company will pay $25,000 to Symbion by February 10, 2005, 30 days
after execution of the agreement.
o The Company will pay $275,000 to Symbion once the Company's secondary
financing is received.
The Company paid Symbion $25,000 out of loan proceeds received in March 2005.
Although the payment was late, Symbion accepted it and the contract is in force.
The Company issued the above-referenced 83,122 non-qualified stock options on
March 20, 2006.
The results of the Phase II/III studies for Cytolin shall be the sole property
of the Company upon Symbion's receipt of the final payment called for by this
agreement. If all remaining payments are not received, the property shall revert
to Symbion. The balance due of $337,342 is included in the accompanying
financial statements as "Indebtedness to related parties".
The above related party transactions were not consumated at arms length.
8 - Preferred Stock
The company has 5 million shares of no par preferred stock authorized. Related
to the acquistion of AGTI (see Note 4), on January 30, 2007, the Company
designated and issued 100,000 shares of the preferred stock as Series A
Convertible Preferred Stock (Series A). The series A was valued based on the
assets received (See Note 4) . The Series A has the following rights and
designations:
o No par
o No voting rights
o Converts into $1,300,000 worth of common unregistered restricted shares of
CytoDyn, Inc. common stock. The option to convert is at the holder's option
at any time after 12 months and before 36 months from the date of closing
of the agreement. The conversion option has a floor price of $.30 per
share, which limits the maximum number of shares that the company may issue
upon conversion to 4,333,333 shares of common stock.
o The Series A holders are entitled to a 5% yeild return compunded quarterly,
paid in cash or in kind and is required to be repaid at the time of
conversion by the company to the Series A holder.
18
Part I. Item 2. Plan of Operation
During the next 12 months, our objectives are:
o to mount and, if possible, complete a Phase I study of our trivalent
DNA-based, pre-flu vaccine. This study will be designed to evaluate safety
as well as two potential indications: first, to help protect those who are
at high risk of life-threatening complications from the seasonal flu, and
second, to provide a potential means of protecting human populations from
the bird flu should a pandemic occur, especially if there is an
insufficient supply of inactived vaccine. The former will be evaluated
directly, while the latter would be implied, in both cases, using the
standard and accepted surrogate markers for humoral immunity;
o to meet with the FDA and seek approval to continue clinical trials of
Cytolin(R);
o to continue our efforts to protect our technology by obtaining additional
patents in The United Kingdom, the European Union and Hong Kong; and by
aggressively opposing efforts to usurp or abscond with our AIDS drug
resulting from its large potential value; o to raise approximately $2 to $8
million in additional funds needed to support our research and development
efforts, the clinical trials relating to our pre-flu vaccine and Cytolin(R)
and our general and administrative expenses, while keeping dilution to a
minimum if possible; and
o to explore joint venture arrangements for, or in combination with, other
possible pharmaceutical products.
DNA-Based Pre-Flu Vaccine
In July 2006, we acquired the exclusive right to develop a unique DNA-based
pre-flu vaccine developed at the University of Massachusetts after completion of
seminal scientific research. We acquired these rights for our wholly-owned
subsidiary, Advanced Influenza Technologies, Inc. from UTEK Corporation, a
publicly traded company that invests in promising technologies. UTEK contributed
a significant amount of cash, as well as the technology, in exchange for
2,000,000 shares of unregistered stock in CytoDyn.
The flu poses a serious, global, public-health problem. Unlike other viruses,
the influenza or flu virus changes every year causing an outbreak of seasonal
flu that usually peaks in January. Because the virus has changed, a new vaccine
must be manufactured and tested every year once the new strain of flu virus has
been isolated. The seasonal flu results in about 200,000 hospitalizations and
tens of thousands of deaths every year. Even in healthy young adults who do not
have a life-threatening infection, the seasonal flu epidemic results in lost
productivity and can make entire families feel miserable. Sometimes the flu
virus changes so much by combining with bird or avian flu virus that a lethal
pandemic sweeps the world causing tens of millions of deaths.
Although there are many flu vaccines in development, our product is designed for
a unique and profitable niche that uses a seminal technology developed at the
University of Massachusetts Medical School.
19
How it Works
Strains of the flu virus that the human immune system has not seen before are
the ones that cause a seasonal flu every year and, from time to time, cause a
lethal pandemic of the flu. Our DNA Plasmid vaccine works with an injection
containing viral DNA that will teach the immune system how to recognize various
strains of the flu that have not yet broken out to cause widespread illness. The
viral DNA by itself does not cause the flu. Therefore, the immune system can
recognize the flu virus before the virus itself is present. This will help the
immune system fight the virus if a patient becomes infected. The DNA Vaccine is
used in conjunction with the traditional viral based influenza vaccines as a
pre-flu vaccine for maximum protection against influenza viruses including the
avian or bird flu strains. By simply changing the DNA sequences that are
contained in a pre-flu shot, the DNA pre-flu vaccine can easily and quickly
adapt to new strains of a virus that threatens to break out and cause a
pandemic.
The Advantages of Our DNA-Based Pre-Flu Vaccine
o Helps Protect against the seasonal flu.
o Helps protect against the bird flu.
o All in one series of flu shots.
o Easily adapted for new strains of the flu.
o You can get your pre-flu shots anytime before flu season, which is
convenient for doctors and patients.
Advantages Over Antiviral Drugs
Antiviral drugs have to be taken soon after symptoms appear or they provide no
benefit. Our pre-flu injection can be given at any time during the year before
the flu season. The use of antiviral drugs causes the flu virus to mutate and
become resistant to those drugs. According to public health officials, and the
website http://www.cdc.gov/flu/avian/gen-info/facts.htm, the avian flu virus
that has crossed the species barrier, H5N1, has become resistant to amantadine
and Fluadime (rimantadine). Use of a pre-flu vaccine does not cause the virus to
mutate to a strain that is resistant to the pre-flu vaccine because it is the
immune system and not the pre-flu vaccine that suppresses the virus.
We hope to conduct the first clinical trial of our pre-flu vaccine by the
2007-2008 flu season, depending upon FDA protocol approvals, uneventful
manufacturing, adequate enrollment of human subjects, and closing of the Maximum
Offering.
Treatment for HIV/AIDS Cytolin(R)
We recently acquired the exclusive right to develop an improved version of
Cytolin(R) using two antibodies invented at Harvard University Medical School's
CBR Institute for Biomedical Research. Cytolin(R) treats HIV/AIDS by preventing
killer T cells from destroying the CD4 T cells in humans infected with HIV which
results in an impaired immune system. It is based upon a discovery made and
published independently in the 1990's by our CEO, Allen D. Allen, et al.;
Leonard Adelman; and Joyce Zarling, et al. Cytolin(R) is intended as a "salvage
therapy" for patients who have failed or are failing Highly Active
Antiretroviral Therapy (HAART). The Phase I(b)/II(a) study was completed with
encouraging results and we are in the process of setting up a meeting with the
FDA to gain approval to conduct further trialsThere is no assurance that
Cytolin(R) or any other product will be successfully developed. "Cytolin(R)" is
the registered trademark of CytoDyn, Inc.
20
Formaxycin
CytoDyn will be researching opportunities for the formulation of Formaxycin(TM),
a topical dermatological product to improve the appearance of human skin by
eliminating dysplastic and pre-cancerous conditions.
Clinical Trials Process
Phase I
Phase I includes the initial introduction of an investigational new drug or
biologic into humans. These studies are closely monitored and may be conducted
in patients, but are usually conducted in a small number of healthy volunteer
subjects. These studies are designed to determine the metabolic and
pharmacologic actions of the investigational product in humans, the side effects
associated with increasing doses, and, if possible, to gain early evidence on
effectiveness. During Phase I, sufficient information about the investigational
product's pharmacokinetics and pharmacological effects are obtained to permit
the design of well-controlled, scientifically valid, Phase II studies.
Phase II
Phase II includes the early controlled clinical studies conducted to obtain some
preliminary data on the effectiveness of the drug for a particular indication or
indications in patients with the disease or condition. This phase of testing
also helps determine the common short-term side effects and risks associated
with the drug. Phase II studies are typically well-controlled, closely
monitored, and conducted in a relatively small number of patients, usually
involving several hundred people.
Phase III
Phase III studies are expanded controlled clinical studies. They are performed
after preliminary evidence suggesting effectiveness of the drug has been
obtained in Phase II, and are intended to gather the additional information
about effectiveness and safety that is needed to evaluate the overall
benefit/risk relationship of the drug. Phase III studies also provide an
adequate basis for extrapolating the results to the general population and
transmitting that information in the physician labeling. Phase III studies
usually include several hundred to several thousand people.
Status of Clinical Trials for Cytolin(R)
Phase I(b)/II(a) clinical trials were conducted by Symbion Research
International under the sponsorship of Amerimmune, Inc. during 2002. We believe
that the data from these trials support approval by the FDA of Phase II(b)
trials. We are purchasing the data from these trials from Symbion and will use
the data to present to the FDA. Or we may use the new hybridomas we obtained
from Harvard University's CBR Institute for Biomedical Research to develop an
improved version of Cytolin(C) beginning with a new Phase I/II study.
Status of Clinical Trials for Influenza Pre-Flu Vaccine
No Investigational New Drug Application (IND) has yet been submitted to the FDA.
Once we have finalized our development plan we will request a pre-IND meeting
with the FDA.
21
Projected costs to complete our research and development and to obtain FDA
approval of a Biologics Licensing Application for Cytolin(R):
We have negotiated with Symbion International for the right to use the Phase
I(b)II(a) data from Cytolin(R) Trials, for a total of $362,000 and to seek
approval for the Phase II(b) trials from the FDA. If the Phase II study is
approved by the FDA, we expect it, together with the pre-Phase II efforts, to
cost an estimated $6,056,981 for Symbion to conduct the clinical trials,
including estimated manufacturing and supply costs of $450,000 and $362,000 for
the Phase Ia/b data.
The estiamted cost for manaufacturing and conducting a Phase 1 clinical trial on
our DNA pre-flu vaccine is approximately $2,000,000. We hope to begin the
manufacturing process with the Waisman Clinical Biomanufaturing Facility this
next quarter and expect to submit to the FDA, a protocol for a Phase 1 clinical
trial this next fiscal year.
- --------------------------------------------------------------------------------
Timing and anticipated completion dates for research and development.
Clinical trials for Cytolin can take anywhere from 29 to 42 months. Until we
have met with the FDA, which we plan to do within the next six months, we cannot
be certain what additional work must be done before commencing Phase II(b)
trials of Cytolin(R).
Date we expect to begin benefiting from the product.
- --------------------------------------------------------------------------------
We hope to complete our research and development of all Cytolin clinical trials
needed for approval of a marketing application, if at all, by December 2012 but
might get product into the clinic for the limited indication of salvage therapy
as early as 2009 via treatment INDs depending upon the results from Phase II(b).
In fiscal 2007 we intend to begin a proof-of-principle trial of plasmid DNA
containing three influenza A hemagglutinin antigens. If successful, this could
justify the manufacturing and safety testing of a polyvalent product to be
stockpiled by public health officials to prevent a future lethal pandemic
associated with the avian (bird) virus. The indication for the seasonal antigens
would probably be limited to individuals at high risk, such as children, the
elderly, and those with chronic diseases, such as COPD. Much depends upon the
next couple of flu seasons, the potential emergence of avian-mammalian hybrid
influenza viruses, and competing vaccines.
Risks and uncertainties associated with completing development within reasonable
period of time and if products are not completed on a timely basis.
Even if we are able to complete the development within a reasonable period of
time our competitors could still come out with something competitive to our
product. Toxicity in the product could go undetected until Phase IV Safety
Surveillance after drug approval. We may have to continue to litigate to protect
technology, or challenges to patents that have not yet expired, etc. The medical
community may not accept our product. There may be an inability to secure 3rd
party payees such as if Medicare would cover costs. Post registration
manufacturing problems or downturn of economy or industry could also be risks.
22
If we are unable to complete clinical trials on a timely basis, with favorable
results, our costs will increase significantly and we may not have enough
capital to support further research and development and continue in business.
Also, if we incur significant delays in being able to market our product, even
if we are ultimately able to do so, we will be delayed in earning revenues and
probably will require additional financing to continue in business. Please see
the section entitled "Risk Factors."
Patents
We have a License Agreement with Allen D. Allen, our president, that gives us
the exclusive right to develop his technology worldwide. This includes issued
U.S. patents 5,424,066; 5,651,970 and 6,534,057, foreign counterparts, as well
as European Patent No. 94 912826.8, for the United Kingdom, Germany, France,
Switzerland, Italy, the Netherlands, Portugal, Spain, and Sweden. Other Patents
are pending in those same countries. We estimate the costs associated with these
pending patents to be approximately $65,000, including amounts we have already
spent. We may file additional patents during the current fiscal year if our
research and development efforts warrant them, but we do not have any such
potential patents identified at this time other than Hong Kong. The license
acquired gives us the right to develop Mr. Allen's patents worldwide.
Our wholly owned subsidiary AITI has a non-exclusive license to the following
patents from the University of Massachusetts
-------------------- --------------- -------------- ------------- ---------
Serial Number Filing Date Issue Date Patent # Country
-------------------- --------------- -------------- ------------- ---------
08/009,833 1/27/1993 7/1/1997 5,643,578 USA
-------------------- --------------- -------------- ------------- ---------
08/187,879 1/27/1994 1/11/2005 6,841,381 USA
-------------------- --------------- -------------- ------------- ---------
10/763,049 1/22/2004 NA pending USA
-------------------- --------------- -------------- ------------- ---------
PCT/US93/02394 3/17/1993 NA NA PCT
-------------------- --------------- -------------- ------------- ---------
PCT/US95/00997 1/25/1995 NA NA PCT
-------------------- --------------- -------------- ------------- ---------
93907536 3/17/1993 NA NA EP
-------------------- --------------- -------------- ------------- ---------
01202355.2 6/18/2001 NA NA EP
-------------------- --------------- -------------- ------------- ---------
2,132,836 9/23/1994 NA NA CA
-------------------- --------------- -------------- ------------- ---------
2,181,832 1/25/1995 NA NA CA
-------------------- --------------- -------------- ------------- ---------
07-520142 1/25/1995 NA NA JP
-------------------- --------------- -------------- ------------- ---------
2003-28160 7/29/2003 NA NA JP
-------------------- --------------- -------------- ------------- ---------
JP7507203
-------------------- --------------- -------------- ------------- ---------
JP9508622T
-------------------- --------------- -------------- ------------- ---------
JP2004099603
-------------------- --------------- -------------- ------------- ---------
AU3150295
-------------------- --------------- -------------- ------------- ---------
Our wholly owned subsidiary AITI has an exclusive license to the following
patents(s) exclusively from the University of Massachusetts
University invention disclosure UMMC04-96 entitled "Influenza Nucleic Acids,
Polypeptides, and Uses Thereof" as embodied in Patent Applications 60/655,979;
11,362,617; and PCT/US2006/006701 and naming Shan Lu and Shixia Wang as
inventors.
We have a license agreement through our wholly owned subsidiary, Advanced
Genetic Technologies, Inc.(AGTI) with the Center for Biological Research at the
Harvard Medical school for certain Bilogical Materials. The license fees have
been prepaid for the first seven years.
23
Litigation
For a thorough discussion of our pending litigation, please see the section
entitled "Legal Proceedings."
Establishing a Market and Obtaining Funding
On June 17, 2005 5:00pm EST, the Securities and Exchange Commission declared our
public registration prospectus effective. 450,000 shares were then sold at $0.75
per shares and the offering was closed July 31, 2005. The proceeds from the
public offering paid were used for working capital.
As of May 31, 2005, we had seven unsecured notes payable to individuals,
totaling $121,000. The notes were issued in February and March 2005, carried a
5% interest rate, and were to mature one year from the date of the note. On
August 29, 2005, we extinguished the outstanding promissory notes and related
accrued interest with the issuance of 160,110 shares of its common stock.
From January 2006 through March 31, 2007 we raised $602,000 through convertible
promissory notes at a conversion price of $1.25 with warrants attached and
exercisable at $2.50 per share and an interest rate of 5% per annum. $587,000 of
the notes have been converted into 469,600 common shares. 12,000 shares remain
from convertible notes outstanding of $15,000. To date, none of the warrants
have been exercised.
When we acquired our wholly owned subsidiary AITI, in July 2006, we acquired
$512,200 in cash, and a $162,800 prepaid sponsored research project.
When we acquired our wholly owned subsidiary AGTI, in January 2007, we acquired
$100,000 in cash, and a $67,500 prepaid license.
We will require additional funding during the 2007 fiscal year in order to
continue with research and development efforts. In addition to operating funds,
we will need approximately $2,000,000 to $8,000,000 for research and
development, including clinical trials, and manufacturing and supply costs,
depending upon whether we are approved by the FDA to conduct a Phase II(b) study
of Cytolin and/or a Phase I study of plasmid DNA.
We have entered into a Placement Agent Agreement with Capital Growth Resources,
a broker-dealer registered with the National Association of Securities Dealers
to raise up to $3.25 million. $2,000,000 of the proceeds would be used for a
Phase I safety and proof of principle, clinical trial of our DNA based pre-flu
vaccine. The remaining proceeds would be used for businmess operations over the
next 12 months. If we are unable to secure the necessary funding, we will not be
able to conduct our research and development activities or to continue in
business.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, we are currently in the development stage with losses for
all periods presented. These factors, among others, raise substantial doubt
about our ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
we be unable to continue as a going concern. Our continuation as a going concern
is dependent upon its ability to obtain additional operating capital, complete
development of its medical treatments, obtain FDA approval, outsource
manufacturing of the treatments, and ultimately to attain profitability. We
intends to seek additional funding through equity offerings or licensing
agreements to fund its business plan. There is no assurance that we will be
successful in these endeavors.
Joint Ventures
Buy-Sell Agreement with Symbion Research International, effective January
5, 2005.
Peggy C. Pence, PhD., is the President and Chief Executive Officer of Symbion
Research International, Inc. On January 5, 2005, we entered into a buy-sell
agreement to purchase intellectual property owned by Symbion. The agreement
describes the intellectual property in detail which summarized, is the Phase 1
clinical data and the protocol for the Phase II study.
24
Under the terms of this agreement:
o CytoDyn, Inc may purchase Symbion's Phase I clinical data in connection
with obtaining approval from the FDA to conduct the Phase II/Phase III
stud(ies) for Cytolin.
o CytoDyn, Inc granted 83,122 non-qualified stock options with an exercise
price of $.75 per share in March 2006 - Symbion requested in September 2006
that these options be cancelled and the remaining $62,341 would be payable
in cash. We therefore cancelled these options previously granted.
o CytoDyn, Inc paid $25,000 in March 2005.
o CytoDyn, Inc will pay $275,000 plus the additional $62,341 to Symbion over
fiscal year 2007.
The results of the Phase II(b) stud(ies) for Cytolin shall be the sole property
of CytoDyn, Inc upon Symbion's receipt of the final payment called for by this
agreement. If all remaining payments are not received, the property shall revert
to Symbion.
Contract with UTEK(r)
We have entered into an agreement with UTEK(r) in March 2006, wherein UTEK(r)
agrees to identify and present new technology and company acquisition
opportunities for CytoDyn in exchange for 40,000 unregistered shares of common
stock. 1/12th of the shares (3,333) shall vest each month during the term of the
12 month agreement.
UTEK(R) is a leading, market-driven technology transfer company that enables
companies to rapidly acquire innovative technologies from universities and
research laboratories worldwide. UTEK facilitates the identification and then
finances the acquisition of external technologies for clients in exchange for
their equity securities. This unique process is called U2B(r). In addition to
its U2B(r) service, UTEK offers both large and small capitalization companies
the tools to search, analyze and manage university intellectual properties.
Acquisition of Advanced Influenza Technologies, Inc.
On July 18, 2006 CytoDyn, Inc. entered into an Acquisition agreement with UTEK
Corporation, to acquire 100% of the outstanding stock of Advanced Influenza
Technologies, Inc.(AITI), a Florida Corporation in exchange for 2,000,000
unregistered restricted common shares of CytoDyn, Inc stock.
AITI holds the worldwide nonexclusive and exclusive license agreements from the
University of Massachusetts for certain technologies as described in patents:
o US Patent Application 60/655,979
o US 11,362,617 for "Influenza Nucleic Acids Polypeptides and Uses Therof
o US 5,643,578
o US 6,841,381
o European Patents 93907536 and 01202355.2 for "Immunization by Inoculation
of DNA Transcription Unit"
The term of the licensing agreement expires upon the later of 20 years from the
filing date of the licensed patents or the expiration of the last to expire
patent of the licensed patents.
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 4% royalties of net sales of the licensed
products.
AITI also has agreed to fund a two year ($325,600) unrestricted project for
($162,800 per year) under a Sponsored Research Agreement with the primary
objective during the first year to conduct lab work to provide well documented 3
DNA plasmids (H1,H3 and H5) in preparation for GMP manufacturing. If after one
year the desired outcome is not achieved the agreement can be cancelled and the
second year's payment is not required.
Acquisition of Advanced Genetic Technologies, Inc.
On January 30, 2007 CytoDyn, Inc. entered into an Acquisition agreement with
UTEK Corporation, to acquire 100% of the outstanding stock of Advanced Genetic
Technologies, Inc.(AITI), a Florida Corporation in exchange for 100,000
preferred no par value stock convertible into $1,300,000 worth of common
unregistered restricted shares of CytoDyn, Inc stock. The option to convert is
any time after twelve (12) months and before thirty six (36) months from the
date of closing of the agreement. The conversion option has a conversion floor
price of $.30 per share, which limits the maximum number of shares that we may
be required to issue upon conversion to 4,333,333 shares of common stock.
25
AGTI holds the worldwide exclusive and nonexclusive license agreements from the
CBR Institute for Biomedical Research affilaited with Harvard Medical School for
certain biological materials.
The term of the licensing agreement is until the later of 20 years or the date
the last patent expires that is owned or controlled by the Licensee.
Milestone fees are payable to the University per licensed product and due within
30 days of the event of certain occurrences required.
The University shall also receive 2% royalties of net sales of the licensed
products up to $200 million and 3% royalties of net sales in excess of $200
million. In the case of a sublicense the Univeristy would get 25% of non-royalty
sublicense income.
AGTI has prepaid the license fees in full for the next 7 years and has $100,000
in cash.
Exploring Other Joint Ventures
While we continue to pursue FDA approval of our existing pipeline products, we
are also considering entering into joint ventures to develop or co-develop other
related, synergistic types of products. We may also pursue joint ventures or
other arrangements to obtain funding but we have not pursued this possibility
and do not have any prospects at this time.
Other Matters
We do not expect, in the next 12 months, to make any significant expenditures
for equipment. We will continue to staff the company as we grow and funds become
available. During the fiscal year ended May 31, 2006, we expended $215,384 in
professional fees, consisting of $150,894 legal fees and professional fees
incurred in connection with our public registration, our additional patent
protection filings, and litigating our pending lawsuits, and $15,900in
accounting and auditing fees. Transfer agent fees and EDGAR filing fees were
$5,926 and $1,979 respectively. $50,685 was paid for consulting work to various
consultants.
We were previously trading on the OTCBB. The NASD delisted our stock effective
December 11, 2006 due to the late filing of the August 31, 2006 10QSB/A. We are
currently trading on the pink sheets under the same trading symbol CYDY.
Part 1 Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
or the Exchange Act, as of February 28, 2007, to ensure that information
required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities Exchange Commission's rules and forms,
including to ensure that information required to be disclosed by us in the
reports filed or submitted by us under the Exchange Act is accumulated and
communicated to management, including our principal executive and principal
financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of February 28, 2007, our disclosure controls and procedures were not effective
at the reasonable assurance level due to the material weakness described below.
A material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. In connection with their review of
our consolidated financial statements for the nine months ended February 28,
2007, Pender Newkirk & Company LLP, our independent registered public accounting
firm ("Pender"), advised management and our audit committee of the following
matter that Pender considered to be a material weakness: The organization of our
accounting department did not provide us with the appropriate resources and
adequate technical skills to accurately account for and disclose our activities.
26
Pender stated that this matter was evidenced by the following issues encountered
in connection with thier review of the consolidated financial statements for the
period ended February 28, 2007: (i) our closing procedures were not adequate and
resulted in significant accounting adjustments, and (ii) we were unable to
adequately perform the financial reporting process as evidenced by a significant
number of management comments related to our consolidated financial statements
and related disclosures for the period ended February 28, 2007. In addition to
issues (i) and (ii) above, which Pender restated as issues encountered in
connection with its review of our consolidated financial statements for the
three and nine months ended February 28, 2007, Pender stated that this matter
was further evidenced by inadequate supervision within our accounting department
which contributed to our inability to provide accurate accounting for and
disclosure of certain transactions.
As a result of the identification of this matter by Pender, management
evaluated, with consultation from our audit committee, in the third quarter of
2007 and as of February 28, 2007, the impact of our lack of appropriate
resources and adequate technical skills in our accounting department and
concluded, that the control deficiency that resulted in our lack of appropriate
resources and adequate technical skills in our accounting department represented
a material weakness and concluded that, as of February 28, 2007, our disclosure
controls and procedures were not effective at the reasonable assurance level.
Historically, we have not had a formal system of controls and procedures due to
the fact that we were small in size and had no operations. Currently,
management, with the oversight of the Chief Executive Officer and Chief
Financial Officer, is devoting considerable effort to develop and implement a
formal system of disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
To initially address this material weakness, management performed additional
analyses and other procedures to ensure that the financial statements included
herein fairly present, in all material respects, our financial position, results
of operations and cash flows for the periods presented.
Remediation of Material Weakness
To remediate the material weakness in our disclosure controls and procedures
identified above, we have done or intend to do the following, in the periods
specified below:
In the fourth quarter of 2007, we will develop plans to alter the current
organization of our accounting department to hire additional consultant(s) to
assist in our financial reporting processes, with expertise in public company
financial reporting compliance.
In the fourth quarter of fiscal year 2007, we will seek guidance from financial
consultants who are certified public accountants with the requisite background
and experience to assist us in identifying and evaluating complex accounting and
reporting matters. In addition, during these periods, we are in the process of
implementing new internal processes for identifying and disclosing both routine
and non-routine transactions and for researching and determining proper
accounting treatment for those transactions. Management is unsure, at the time
of the filing of this report, when the actions described above will remediate
the material weakness also described above. Although management intends to hire
one or more additional accounting supervisory support staff members, future
additional funds will be necessary to support the staff. Until we hire the
necessary additional accounting supervisory support staff members, management
may hire outside consultants to assist us in satisfying our financial reporting
obligations.
Management is unable, however, to estimate our expenditures related to fees paid
or that may be paid in the future to financial consultants in connection with
their guidance in identifying and evaluating complex accounting and reporting
matters. Management is also unable to estimate our expenditures related to the
development of new internal processes for identifying and disclosing both
routine and non-routine transactions and for researching and determining proper
accounting treatment for those transactions. Management is also unable to
estimate our expenditures related to the hiring of other outside consultants to
assist us in satisfying our financial reporting obligations. In addition,
management is unable to estimate our expenditures related to higher fees to be
paid to our independent auditors in connection with their review of this
remediation.
27
Changes in Internal Control over Financial Reporting
The changes noted above, specifically, the changes relating to our (i) engaging
of financial consultants who are certified public accountants to assist us in
identifying and evaluating complex accounting and reporting matters, (ii) new
internal processes for identifying and disclosing both routine and non-routine
transactions and for researching and determining proper accounting treatment for
those transactions, and (iii) assignment of individuals to perform these
processes and provision to those individuals of technical and other resources to
help ensure the proper application of accounting principles and the timely and
appropriate disclosure of routine and non-routine transactions, are the only
changes during our most recently completed fiscal quarter that have materially
affected or are reasonably likely to materially affect, our internal control
over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act.
Part II Item 1 Legal Proceedings
- --------------------------------
We believe all litigation reflects the efforts of Rex H. Lewis, the previous CEO
of the previous licensee Amerimmune, Inc. of the previous privately-held company
that held the Cytolin(R)technology, CytoDyn of New Mexico, Inc., to take the
property of Amerimmune, Inc., CytoDyn, Inc. our CRO, Symbion Research
International, Inc. and the manufacturer of Cytolin(R), Vista Biologicals
Corporation, for his privately held Nevada corporation, Maya, LLC. Although
these efforts have been multifaceted and interstate in scope, all litigation
reflects this one dispute or artifice.
Rex H. Lewis, a Defendant and former director and C.E.O. of Amerimmune
Pharmaceuticals, Inc. filed a First Amended Cross-Complaint against CytoDyn of
New Mexico, Inc., Allen D. Allen, Corinne E. Allen, Ronald J. Tropp, Brian J.
McMahon, Daniel M. Strickland, M.D. and unknown others designated as "Does
101-150".
The Cross-Complaint was settled pursuant to a settlement agreement entered into
by the parties involved. The terms of the agreement are confidential.
In 2001, CytoDyn of New Mexico, Inc. as a shareholder, sued its licensee
Amerimmune Pharmaceuticals, Inc. (API) and its directors in order to prevent the
destruction of API. The Los Angeles Superior Court awarded attorneys' fees in
the amount of approximately $150,000 to the insurance company of API. In 2003
CytoDyn, Inc. acquired the assets of CytoDyn of New Mexico, Inc. We have
appealed the Court's order. The matter has not yet been briefed.
CytoDyn, Inc. and Allen D. Allen v. Amerimmune, Inc. and Amerimmune
- --------------------------------------------------------------------------------
Pharmaceuticals, Inc. v. Biovest International, Inc., Commonwealth of
Massachusetts, Superior Court, Worcester County, Civil Action No. 05-0452-C.
- --------------------------------------------------------------------------------
28
Nature of the claims:
- --------------------------------------------------------------------------------
CytoDyn and Mr. Allen filed a complaint against Amerimmune, Inc. and Amerimmune
Pharmaceuticals, Inc. (together, "Amerimmune") to domesticate an October 4, 2004
judgment that CytoDyn and Mr. Allen obtained against Amerimmune in the Superior
Court of California for Ventura County, case number SC-039250. Further, CytoDyn
and Mr. Allen named Biovest International, Inc. ("Biovest") as a
trustee-defendant because Biovest possesses a Cell-Bank, the rights to which
CytoDyn and Mr. Allen own.
- --------------------------------------------------------------------------------
Progress to Date:
- --------------------------------------------------------------------------------
CytoDyn and Mr. Allen were successful in having the California judgment
domesticated. Further, CytoDyn and Mr. Allen were successful in "charging"
Biovest and securing an order that Biovest transfer the Cell-Bank to CytoDyn.
However, the transfer has not occurred because recently Amerimmune's purported
successor-in-interest, Maya, Inc. ("Maya"), intervened. Since CytoDyn expects to
make a new cell bank in any event, this action is opposed because it is one part
of an interstate scheme or artifice to convert our property.
- --------------------------------------------------------------------------------
CytoDyn's's Response:
- --------------------------------------------------------------------------------
Maya, LLC purports to have taken the property of Amerimmune Pharmaceuticals,
Inc. by foreclosing on all of its property with a security instrument Maya, LLC
presented to a State Court in Nevada. CytoDyn had already recovered its
property, so even if Maya had taken the property of Amerimmune Pharmaceuticals,
it would not include our technology. Maya foreclosed on the wrong entity since
it was Amerimmune, Inc. that had originally held the technology, not Ammerimune
Pharmaceuticals, Inc. Evidence obtained through discovery shows that the Board
of Directors of Amerimmune Pharmaceuticals, Inc. had instructed Mr. Lewis to
amend his security instrument to conform to law, which he did not do before
presenting the instrument to the Court. This, and other evidence, will be used
by CytoDyn's's lawyer in Massachusetts, and the attorney for Symbion Research
International in Nevada, to seek summary judgments.
- --------------------------------------------------------------------------------
Expected Outcome:
- --------------------------------------------------------------------------------
We cannot express judgment regarding the outcome of the case or the probable
ultimate liability, if any, to be incurred by CytoDyn. However, CytoDyn's claim
to the Cell-Bank is strong and discovery has resulted in an intention on the
part of our attorney to obtain summary judgment in our favor.
- --------------------------------------------------------------------------------
Other legal/patent issues:
- --------------------------------------------------------------------------------
We have recently discovered that former employees of ex-licensee, Amerimmune
Inc., are attempting to convert technology previously adjudicated by the
Superior Court of California, County of Ventura to belong to Symbion Research
International, LLC. The technology involves LFA-1 Alpha subunit antibodies and
the use of the antibodies to treat HIV-infected patients. Because of uncertain
consequences resulting from the actions of these rogue Amerimmune Inc.
employees, Symbion Research International is acting to remedy the situation. The
former employees have filed two U.S. patent applications and several foreign
patent applications based on a derivative international patent application.
Symbion Research International intends to correct the inventorship and assignee
in these applications.
- --------------------------------------------------------------------------------
29
Background:
- --------------------------------------------------------------------------------
CytoDyn of New Mexico, Inc. granted a license in its patented technology to
Amerimmune Inc., which represented that it would assist in obtaining FDA
approval of Cytolin(R). Amerimmune in turn contracted with Symbion Research
International, LLC to assist with the clinical trials of Cytolin(R). Symbion
sued Amerimmune in 2003 in Superior Court of California, County of Ventura
asserting breach for non-payment of services performed. Symbion prevailed in
that suit and the Ventura Court awarded title to all data and additional
intellectual property developed by Symbion during its relationship with
Amerimmune to Symbion. This additional intellectual property is the subject
matter of the patent applications filed by the former employees of ex-licensee
Amerimmune.
- --------------------------------------------------------------------------------
Maya LLC v. CytoDyn, et al
- --------------------------------------------------------------------------------
Superior Court of Los Angeles Glendale Case # EC041590
- --------------------------------------------------------------------------------
Maya LLC filed an action in Glendale, California alleging a number of complaints
against us and two of its officers, several of which have been dismissed on
demurrer and one of which may be dismissed on procedural grounds. Management
believes that these events reflect a retaliatory and frivolous action on the
part of Maya. Discovery has produced evidence that the allegations of Maya, LLC
are false. Although the outcome of litigation is uncertain, our in-house counsel
believes an outcome unfavorable to us is highly unlikely. Trial is scheduled for
May 8, 2007.
Legal opinions of CytoDyn's attorneys are based on the law and on facts. Due to
jury and jurist nullification, appeals through many courts, which may or may not
be commercially reasonable and which a company may or may not be able to afford,
may be necessary to have the law applied or the proved facts recognized making
the outcome of litigation uncertain.
Part II Item 2 Unregistered Sales of Equity and Use of Proceeds
From January 2006 through March 31, 2007 we raised $602,000 through convertible
promissory notes at a conversion price of $1.25 with warrants attached and
exercisable at $2.50 per share. $587,000 of the notes were converted into
469,600 shares. The remaining notes payable amount is $15,000. To date, none of
the warrants have been exercised.
On January 30, 2007, we entered into an Acquisition Agreement with UTEK
Corporation, to acquire 100% of the outstanding stock of Advanced Genetic
Technologies, Inc. (AGTI), a Florida Corporation in exchange for 100,000
Preferred Series A shares no par value stock convertible into $1,300,000 worth
of unregistered restricted shares of CytoDyn, Inc. common stock. The option to
convert is any time after twelve (12) months and before thirty six (36) months
from the date of the closing of the agreement. The conversion option has a floor
price of $.30 per share, which limits the number of shares that the we may issue
upon conversion to 4,333,333 shares of common stock.
Item 3 Defaults Upon Seniors
None
Item 4 Submission of Matter to a Vote of Security Holders
None
Item 5 Other Information
None
30
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits:
1. 31.1: Certification by the CEO
2. 31.2: Certification by the CFO
3. 32.1: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO
4. 32.2: Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO
SIGNATURES
CYTODYN, INC.
(Registrant)
DATE: April 13, 2007 BY: /s/ Allen D. Allen
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Allen D. Allen
President and CEO
31